Reinventing Savings Bonds

REINVENTING SAVINGS BONDS
By Peter Tufano and Daniel Schneider
Table of Contents
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . 1
II. An Unusual Problem: Nobody Wants My
Money! . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
III. U.S. Savings Bonds: History and Recent
Developments . . . . . . . . . . . . . . . . . . . . . . . 6
A. A Brief History of Savings Bonds . . . . . . . 6
B. Recent Debates Around the Savings Bond
Program and Program Changes . . . . . . . . . 8
IV. Reinventing the Savings Bond . . . . . . . . . . 11
A. Reduce the Required Holding Period for
Bondholders Facing Financial
Emergencies . . . . . . . . . . . . . . . . . . . . . 11
B. Make Savings Bonds Available to Tax
Refund Recipients . . . . . . . . . . . . . . . . . 11
C. Enlist Private-Sector Social Marketing for
Savings Bonds . . . . . . . . . . . . . . . . . . . . 13
D. Consider Savings Bonds in the Context of a
Family’s Financial Life Cycle . . . . . . . . . 13
E. Make the Process of Buying Savings Bonds
More User-Friendly . . . . . . . . . . . . . . . . 14
Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix A: Savings Bonds Today . . . . . . . . . . . 18
Appendix B: Patterns and Trends in Bond
Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
I. Introduction
In a world in which financial products are largely sold
and not bought, savings bonds are a quaint oddity. First
Peter Tufano is the Sylvan C. Coleman Professor
of Financial Management at the Harvard Business
School and a senior associate dean at the school. He
is a research fellow at the National Bureau of Eco-
nomic Research and the founder of D2D fund, a
nonprofit organization. Daniel Schneider is a re-
search associate at Harvard Business School.
Savings bonds have always served multiple ob-
jectives: funding the U.S. government, democratiz-
ing national financing, and enabling families to save.
Increasingly, the authors write, that last goal has
been ignored. A series of efficiency measures intro-
duced in 2003 make these bonds less attractive and
less accessible to savers. Public policy should go in
the opposite direction: U.S. savings bonds should be
reinvigorated to help low- and moderate-income
(LMI) families build assets. More and more, those
families’ saving needs are ignored by private-sector
asset managers and marketers. With a few relatively
modest changes, Tufano and Schneider explain, the
savings bonds program can be reinvented to help
those families save, while still increasing the effi-
ciency of the program as a debt management device.
Savings bonds provide market-rate returns, with no
transaction costs, and are a useful commitment sav-
ings device. The authors’ proposed changes include
(a) allowing federal taxpayers to purchase bonds
with tax refunds; (b) enabling LMI families to re-
deem their bonds before 12 months; (c) leveraging
private-sector organizations to market savings
bonds; and (d) contemplating a role for savings
bonds in the life cycles of LMI families.
The authors would like to thank officials at the
Bureau of Public Debt (BPD) for their assistance
locating information on the savings bonds program.
They would also like to thank officials from BPD and
Department of Treasury, Fred Goldberg, Peter
Orszag, Anne Stuhldreher, Bernie Wilson, Lawrence
Summers, Jim Poterba, and participants at the New
America Foundation/Congressional Savings and
Ownership Caucus and the Consumer Federation of
America/America Saves programs for useful com-
ments and discussions. Financial support for this
research project was provided by the Division of
Research of the Harvard Business School. Any opin-
ions expressed are those of the authors and not those
of any of the organizations listed above.
Copyright 2005 Peter Tufano and Daniel Schneider.
All rights reserved.
TAX NOTES, October 31, 2005 1

offered as Liberty Bonds to fund World War I and then as
baby bonds 70 years ago, savings bonds seem out of
place in today’s financial world. While depository insti-
tutions and employers nominally market those bonds,
they have few incentives to actively sell them. As finan-
cial institutions move to serve up-market clients with
higher-profit-margin products, savings bonds receive
little if no marketing or sales attention. Even Treasury
seems uninterested in marketing them. In 2003 Treasury
closed down the 41 regional marketing offices for savings
bonds and has zeroed out the budget for the marketing
office, staff, and ad buys from $22.4 million to $0 (Block
(2003)). No one seems to have much enthusiasm for
selling savings bonds.
Maybe that lack of interest is sensible. After all, there
are many financial institutions selling a host of financial
products in a very competitive financial environment.
The very name ‘‘savings bonds’’ is out of touch; it is
unfashionable to think of ourselves as ‘‘savers.’’ We are
now ‘‘investors.’’ We buy investment products and hold
our ‘‘near cash’’ in depository institutions or money
market mutual funds. Saving is simply passé, and Ameri-
can families’ savings rate has dipped to its lowest point in
recent history.
Even if we put aside the macroeconomic debate on the
national savings rate, there is little question that lower-
income Americans would be well-served with greater
savings. Families need enough savings to withstand
temporary shocks to income, but a shockingly large
fraction don’t even have enough savings to sustain a few
months of living expenses (see Table 1). Financial plan-
ners often advise that families have sufficient liquid
assets to replace six months of household income in the
event of an emergency. Yet only 22 percent of households,
and only 19 percent of low- and moderate-income house-
holds, meet that standard. Fewer than half (47 percent) of
U.S. households, and only 29 percent of LMI households,
have sufficient liquid assets to meet their own stated
emergency savings goals. Families do somewhat better
when financial assets in retirement accounts are included,
but even then more than two-thirds of households do not
have sufficient savings to replace six months of income.
And while the financial landscape may be generally
competitive, there are low-profit pockets in which com-
petition cannot be counted on to solve all of our prob-
lems. While it may be profitable to sell low-income
families credit cards, subprime loans, payday loans, or
check-cashing services, there is no rush to offer them
savings products. A not insubstantial number of them
may have prior credit records that lead depository insti-
tutions to bar them from opening even savings accounts.
Many do not have the requisite minimum balances of
$2,500 or $3,000 that most money market mutual funds
demand. Many of them are trying to build assets, but
their risk profile cannot handle the potential principal
loss of equities or equity funds. Many use alternative
financial services, or check-cashing outlets, as their pri-
mary financial institution, but those firms do not offer
asset-building products.
For these families, old-fashioned U.S. savings bonds
offer an investment without any risk of principal loss due
to credit or interest rate moves, while providing a com-
petitive rate of return with no fees. Bonds can be bought
in small denominations, rather than requiring waiting
until the saver has amassed enough money to meet some
financial institution’s minimum investment require-
ments. And finally, bonds have an ‘‘out-of-sight and
out-of-mind’’ quality, which fits well with the mental
accounting consumers use to artificially separate spend-
ing from saving behavior.
Despite all of those positives, we feel the savings bond
program needs to be reinvigorated to enhance its role in
supporting family saving. In the current environment,
the burden is squarely on families to find and buy the
bonds. Financial institutions and employers have little or
no incentives to encourage savers to buy bonds. The
Table 1. Fraction of U.S. Households Having Adequate Levels of Emergency Savingsa
Financial Assets
(Narrow)b
Financial Assets
(Broad)c
All Households; Savings adequate to
Replace six months of income 22% 44%
Replace three months of income 32% 54%
Meet emergency saving goald
47% 63%
Household Income < $30,000; Savings adequate to
Replace six months of income 19% 28%
Replace three months of income 25% 35%
Meet stated emergency saving goal 29% 39%
Source: Author’s tabulations from the 2001 Survey of Consumer Finances (SCF (2001))
a
This chart compares different levels of financial assets to different levels of precautionary savings goals. If a household’s fi-
nancial assets met or exceed the savings goals, they were considered adequate. The analysis was conducted for all households
and for households with incomes less than $30,000 per year.
b
Financial Assets (Narrow) includes checking, saving, and money market deposits; call accounts; stock, bond, and combination
mutual funds; direct stock holdings; U.S. savings bonds; and federal, state, municipal, corporate, and foreign bonds.
c
Financial Assets (Broad) includes all assets under Financial Assets (Narrow) as well as certificates of deposit, IRA and Keogh
accounts, annuities and trusts, and the value of all 401(k), 403(b), SRA, Thrift, savings, pensions plans as well as the assets of
other plans that allow for emergency withdrawals of borrowing.
d
Respondents were asked how much they felt it was necessary to have in emergency savings. This row reports the percentage
of respondents with financial assets greater than or equal to that emergency savings goal.
COMMENTARY / SPECIAL REPORT
2 TAX NOTES, October 31, 2005

government has eliminated its bond marketing program.
Finally, by pushing the minimum holding period up to 12
months, the program is discouraging low-income fami-
lies, who might face a financial emergency, from invest-
ing in them. We feel those problems can and should be
solved, so that savings bonds can once again become a
strong part of families’ savings portfolios.
At one point in American history, savings bonds were
an important tool for families to build assets to get ahead.
They were ‘‘designed for the small investor — that he
may be encouraged to save for the future and receive a
fair return on his money’’ (U.S. Department of the
Treasury (1935)). While times have changed, that function
of savings bonds may be even more important now. Our
set of recommendations is designed to make savings
bonds a viable asset building device for low- to
moderate-income Americans, as well as to reduce the cost
to sell them to families. The proposal reflects an impor-
tant aspect of financial innovation. Often financial inno-
vations from a prior generation are reinvented by a new
generation. The convertible preferred stock that venture
capitalists use to finance high-tech firms was used to
finance railroads in the 19th century. Financiers of those
railroads invented income bonds, which have been re-
fined to create trust-preferred securities, a popular fi-
nancing vehicle. The ‘‘derivatives revolution’’ began cen-
turies ago, when options were bought and sold on the
Amsterdam Stock Exchange. Wise students of financial
innovation realize that old products can often be re-
invented to solve new problems.
Here, we lay out a case for why savings bonds, an
invention of the 20th century, can and should be reimag-
ined to help millions of Americans build assets now. In
Section II, we briefly describe why LMI families might
not be fully served by private-sector savings opportuni-
ties. In Section III, we briefly recount the history of
savings bonds and fast-forward to discuss their role in
the current financial services world. In Section IV, we
discuss our proposal to reinvent savings bonds as a
legitimate device for asset building for American fami-
lies. An important part of our proposal involves the tax
system, but our ideas do not involve any new tax
provisions or incentives. Rather, we make proposals
about how changes to the ‘‘plumbing’’ of the tax system
can help revitalize the savings bond program and sup-
port family savings.
II. An Unusual Problem: Nobody Wants My
Money!1
In our modern world, where many of us are bom-
barded by financial service firms seeking our business,
why would we still need or want a 70-year-old product
like savings bonds? To answer that question, we have to
understand the financial services landscape of LMI
Americans, which for our discussion includes the 41
million American households who earn under $30,000 a
year or the 24 million households with total financial
assets under $500 or the more than 18 million U.S.
households making less than $30,000 a year and holding
less than $500 in financial assets (Survey of Consumer
Finances (2001)) and Current Population Survey (2002)).
In particular, we need to understand asset accumulation
strategies for those families, their savings goals, and their
risk tolerances. But we also need to understand the
motives of financial service firms offering asset-building
products.
In generic terms, asset gatherers and managers must
master a simple profit equation: Revenues must exceed
costs. Costs include customer acquisition, customer ser-
vicing, and the expense of producing the investment
product. Customer acquisition and servicing costs are not
necessarily any less for a small account than for a large
one. Indeed, if the smaller accounts are sufficiently
‘‘different,’’ they can be quite costly if held by people
who speak different languages, require more explana-
tions, or who are not well-understood by the financial
institution. The costs of producing the product would
include the investment management expenses for a mu-
tual fund or the costs of running a lending operation for
a bank.
On the revenue side, the asset manager could charge
the investor a fixed fee for its services. However, industry
practice is to charge a fee that is a fraction of assets under
management (as in the case of a mutual fund that charges
an expense ratio) or to give the investor only a fraction of
the investment return (in the classic ‘‘spread banking’’
practiced by depository institutions). The optics of the
financial service business are to take the fee out of the
return earned by the investor in an ‘‘implicit fee’’ to avoid
the sticker shock of having to charge an explicit fee for
services. Financial services firms can also earn revenues if
they can subsequently sell customers other high-margin
products and services, the so-called cross-sell.
At the risk of oversimplifying, the asset manager can
earn a profit on an account if:
Size of Account x (Implicit Fee in Percent) − Marginal Costs
to Serve > 0
Because implicit fees are netted from the gross invest-
ment returns, they are limited by the size of those returns
(because otherwise investors would suffer certain princi-
pal loss.) If an investor is risk-averse and chooses to
invest in low-risk/low-return products, fees are con-
strained by the size of the investment return. For ex-
ample, when money market investments are yielding less
than 100 basis points (bp), it is infeasible for a money
market mutual fund to charge expenses above 100 bp.
Depository institutions like banks or credit unions face a
less severe problem, as they can invest in high-risk
projects (loans) while delivering low-risk products to
investors by virtue of government-supplied deposit in-
surance.
Given even relatively low fixed costs per client and
implicit fees that must come out of revenue, the impor-
tance of having large accounts (or customers who can
purchase a wide range of profitable services) is para-
mount. At a minimum, suppose that statements, cus-
tomer service costs, regulatory costs, and other ‘‘sun-
dries’’ cost $30 per account per year. A mutual fund that
1
Portions of this section are adapted from an earlier paper,
Schneider and Tufano (2004), ‘‘New Savings from Old Innova-
tions: Asset Building for the Less Affluent,’’ New York Federal
Reserve Bank, Community Development Finance Research
Conference.

charges 150 bp in expense ratios would need a minimum
account size of $30/.015 = $2,000 to just break even. A
bank that earns a net interest margin between lending
and borrowing activities of 380 bp would need a mini-
mum account size of $30/.038 = $790 to avoid a loss
(Carlson and Perli (2004)). Acquisition costs make having
large and sticky accounts even more necessary. The cost
per new account appears to vary considerably across
companies, but is substantial. The industrywide average
for traditional banks is estimated at $200 per account
(Stone (2004)). Individual firms have reported lower
figures. TD Waterhouse spent $109 per new account in
the fourth quarter of 2001 (TD Waterhouse (2001)). T.
Rowe Price spent an estimated $195 for each account it
acquired in 2003.2 H&R Block, the largest retail tax
preparation company in the United States, had acquisi-
tion costs of $130 per client (Tufano and Schneider
(2004)). One can justify that outlay only if the account is
large, will purchase other follow-on services, or will be in
place for a long time.
Against that backdrop, an LMI family that seeks to
build up its financial assets faces an uphill battle. Given
the risks those families face and the thin margin of
financial error they perceive, they seem to prefer low-risk
investments, which have more constrained fee opportu-
nities for financial service vendors. By definition, their
account balances are likely to be small. Regarding cross-
sell, financial institutions might be leery of selling LMI
families profitable products that might expose the finan-
cial institutions to credit risk. Finally, what constitute
inconveniences for wealthier families (for example, a car
breakdown or a water heater failure) can constitute
emergencies for LMI families that deplete their holdings,
leading to less sticky assets.
Those assertions about LMI financial behavior are
borne out with scattered data. Tables 2 and 3 report
various statistics about U.S. financial services activity by
families sorted by income. The preference of LMI families
for low-risk products is corroborated by their revealed
investment patterns, as shown by their substantially
lower ownership rates of equity products. Low-income
families were less likely to hold every type of financial
asset than high-income families. However, the ownership
rate for transaction accounts among families in the lowest
income quintile was 72 percent of that of families in the
highest income decile, while the ownership rate among
low-income families for stocks was only 6 percent and for
mutual funds just 7 percent of the rate for high-income
families. The smaller size of financial holdings by the
bottom income quintile of the population is quite obvi-
ous. Even if they held all of their financial assets in one
institution, the bottom quintile would have a median
balance of only $2,000 (after excluding the 25.2 percent
with no financial assets of any kind).
The likelihood that LMI family savings will be drawn
down for emergency purposes has been documented by
Schreiner, Clancy, and Sherraden (2002) in their national
study of Individual Development Accounts (matched
savings accounts intended to encourage asset building
through savings for homeownership, small-business de-
velopment, and education). They find that 64 percent of
participants made a withdrawal to use funds for a
non-asset-building purpose, presumably one pressing
enough that it was worth foregoing matching funds. In
our own work (Beverly, Schneider, and Tufano (2004)),
2
Cost per new account estimate is based on a calculation
using data on the average size of T. Rowe Price accounts, the
amount of new assets in 2003, and annual marketing expenses.
Data is drawn from T. Rowe Price (2003), Sobhani and Shteyman
(2003), and Hayashi (2004).
Table 2. Percent Owning Select Financial Assets by Income and Net Worth (2001)
Savings
Bonds
Certificates
of Deposit
Mutual
Funds Stocks
Transaction
Accounts
All
Financial
Assets
Percentile of Income
Less than 20 3.80% 10.00% 3.60% 3.80% 70.90% 74.80%
20-39.9 11.00% 14.70% 9.50% 11.20% 89.40% 93.00%
40-59.9 14.10% 17.40% 15.00% 16.40% 96.10% 98.30%
60-79.9 24.40% 16.00% 20.60% 26.20% 99.80% 99.60%
80-89.9 30.30% 18.30% 29.00% 37.00% 99.70% 99.80%
90-100 29.70% 22.00% 48.80% 60.60% 99.20% 99.70%
Lowest quintile ownership rate
as a percent of top decile 12.80% 45.50% 7.40% 6.30% 71.50% 75.00%
Percentile of net worth
Less than 25 4.30% 1.80% 2.50% 5.00% 72.40% 77.20%
25-49.9 12.80% 8.80% 7.20% 9.50% 93.60% 96.50%
50-74.9 23.50% 23.20% 17.50% 20.30% 98.20% 98.90%
75-89.9 25.90% 30.10% 35.90% 41.20% 99.60% 90.80%
90-100 26.30% 26.90% 54.80% 64.30% 99.60% 100.00%
Lowest quintile ownership rate
as a percent of top decile 16.30% 6.70% 4.60% 7.80% 72.70% 77.20%
Source: Aizcorbe, Kennickell, and Moore (2003).

we surveyed a selected set of LMI families about their
savings goals. Savings for emergencies was the second
most frequently named savings goal (behind unspecified
savings), while long horizon saving for retirement was a
goal for only 5 percent of households. A survey of the
15,000 participants in the America Saves program found
similar results with 40 percent of respondents listing
emergency savings as their primary savings goal (Ameri-
can Saver (2004)). The lower creditworthiness of LMI
families is demonstrated by the lower credit scores of
LMI individuals and the larger shares of LMI families
reporting having past-due bills.3
Given the economics of LMI families and of most
financial services firms, a curious equilibrium has
emerged. With a few exceptions, firms that gather and
manage assets are simply not very interested in serving
LMI families. While their ‘‘money is as green as anyone
else’s,’’ the customers are thought too expensive to serve,
their profit potential too small, and, as a result, the effort
better expended elsewhere. While firms don’t make
public statements to that effect, the evidence is there to be
seen:
• Among the top 10 mutual funds in the country, eight
impose minimum balance restrictions upwards of
$250. Among the top 500 mutual funds, only 11
percent had minimum initial purchase requirements
of less than $100 (Morningstar (2004)). See Table 4.
• Banks routinely set minimum balance requirements
or charge fees on low balances, in effect discourag-
ing smaller savers. Nationally, minimum opening
balance requirements for statement savings ac-
counts averaged $97 and required a balance of at
least $158 to avoid average yearly fees of $26. Those
fees were equal to more than a quarter of the
minimum opening balance, a management fee of 27
percent. Fees were higher in the 10 largest Metro-
politan Statistical Areas (MSAs), with average mini-
mum opening requirements of $179 and an average
minimum balance to avoid fees of $268 (Board of
Governors of the Federal Reserve (2003)). See Table
5. While those numbers only reflect minimum open-
ing balances, what we cannot observe is the level of
marketing activity (or lack thereof) directed to rais-
ing savings from the poor.
• Banks routinely use credit scoring systems like
ChexSystems to bar families from becoming cus-
tomers, even from opening savings accounts that
pose minimal, if any, credit risks. Over 90 percent of
bank branches in the U.S. use the system, which
enables banks to screen prospective clients for prob-
lems with prior bank accounts and to report current
clients who overdraw accounts or engage in fraud
(Quinn (2001)). Approximately seven million people
have ChexSystems records (Barr (2004)). While
ChexSystems was apparently designed to prevent
banks from making losses on checking accounts, we
understand that it is not unusual for banks to use it
to deny customers any accounts, including savings
accounts. Conversations with a leading U.S. bank
suggest that policy arises from the inability of bank
operational processes to restrict a customer’s access
to just a single product. In many banks, if a client
with a ChexSystems record were allowed to open a
savings account, she could easily return the next day
and open a checking account.
• Banks and financial services firms have increasingly
been going ‘‘up market’’ and targeting the consumer
segment known as the ‘‘mass affluent,’’ generally
those with over $100,000 in investible assets. Wells
Fargo’s director of investment consulting noted that
‘‘the mass affluent are very important to Wells
Fargo’’ (Quittner (2003) and American Express Fi-
nancial Advisors’ chief marketing officers stated
that, ‘‘Mass affluent clients have special investment
needs . . . Platinum and Gold Financial Services
(AEFA products) were designed with them in mind’’
(‘‘Correcting and Replacing’’ (2004)). News reports
have detailed similar sentiments at Bank of
America, Citi-group, Merrill Lynch, Morgan Stanley,
JP Morgan, Charles Schwab, Prudential, and Ameri-
can Express.
• Between 1975 and 1995 the number of bank
branches in LMI neighborhoods declined by 21
percent. While declining population might explain
some of that reduction (per capita offices declined
by only 6.4 percent), persistently low-income areas,
those that that were poor over the period of 1975-
1995, experienced the most significant decline —
losing 28 percent of offices, or a loss of one office for
every 10,000 residents. Low-income areas with rela-
tively high proportions of owner-occupied housing
did not experience loss of bank branches, but had
very few to begin with (Avery, Bostic, Calem, and
Caner (1997)).
• Even most credit unions pay little attention to LMI
families, focusing instead on better compensated
occupational groups. While that tactic may be prof-
itable, credit unions enjoy tax-free status by virtue of
provisions in the Federal Credit Union Act, the text
of which mandates that credit unions provide credit
‘‘to people of small means’’ (Federal Credit Union
Act (1989)). Given that legislative background, it is
interesting that the median income of credit union
members is approximately $10,000 higher than that
of the median income of all Americans (Survey of
Consumer Finances (2001)) and that only 10 percent
of credit unions classify themselves as ‘‘low in-
come,’’ defined as half of the members having
incomes of less than 80 percent of the area median
household income (National Credit Union Admin-
istration (2004) and Tansey (2001)).
• Many LMI families have gotten the message and
prefer not to hold savings accounts, citing high
minimum balances, steep fees, low interest rates,
3
Bostic, Calem, and Wachter (2004) use data from the Federal
Reserve and the Survey of Consumer Finances (SCF) to show
that 39 percent of those in the lowest income quintile were credit
constrained by their credit scores (score of less than 660)
compared with only 2.8 percent of families in the top quintile
and only 10 percent of families in the fourth quintile. A report
from Global Insight (2003), also using data from the SCF, finds
that families in the bottom two quintiles of income were more
than three times as likely to have bills more than 60 days past
due than families in the top two quintiles of income.

problems meeting identification requirements, deni-
als by banks, and a distrust of banks (Berry (2004)).
• Structurally, we have witnessed a curious develop-
ment in the banking system. The traditional pay-
ment systems of banks (for example, bill paying and
check cashing) have been supplanted by nonbanks
in the form of alternative financial service providers
such as check-cashing firms. Those same firms have
also developed a vibrant set of credit products in the
form of payday loans. However, those alternative
financial service providers have not chosen to offer
asset-building or savings products. Thus, the most
active financial service players in many poor com-
munities do not offer products that let poor families
save and get ahead.
This stereotyping of the financial service world obviously
does not do justice to a number of financial institutions
that explicitly seek to serve LMI populations’ asset-
building needs. That includes Community Development
Credit Unions, financial institutions like ShoreBank in
Chicago, and the CRA-related activities of the nation’s
banks. However, we sadly maintain that those are excep-
tions to the rule, and the CRA-related activities, while
real, are motivated by regulations and not intrinsically by
the financial institutions.
We are reminded about one subtle — but powerful —
piece of evidence about the lack of interest of financial
institutions in LMI asset building each year. At tax time,
many financial institutions advertise financial products
to help families pay less in taxes: IRAs, SEP-IRAs, and
Keoghs. Those products are important — for taxpayers.
However, LMI families are more likely refund recipients,
by virtue of the refundable portions of the earned income
tax credit, the child tax credit (CTC), and refunds from
other sources that together provided over $78 billion in
money to LMI families in 2001, mostly around February
(refund recipients tend to file their tax returns earlier
than payers) (Internal Revenue Service (2001)). With the
exception of H&R Block, which has ongoing pilot pro-
grams to help LMI families save some of that money,
financial institutions seem unaware — and uninterested
— in the prospect of gathering some share of a $78 billion
flow of assets (Tufano and Schneider (2004)).
‘‘Nobody wants my money’’ may seem like a bit of an
exaggeration, but it captures the essential problem of LMI
families wanting to save. ‘‘Christmas Club’’ accounts, in
which families deposited small sums regularly, have all
but disappeared. While they are not barred from opening
bank accounts or mutual fund accounts, LMI families
could benefit from a low-risk account with low fees,
which delivers a competitive rate of return, with a small
minimum balance and initial purchase price, and is
available nationally and portable if the family moves
from place to place. The product has to be simple, the
vendor trustworthy, and the execution easy — because
the family has to do all the work. Given those specifica-
tions, savings bonds seem like a good choice.
III. U.S. Savings Bonds: History and Recent
Developments
A. A Brief History of Savings Bonds
Governments, including the U.S. government, have a
long tradition of raising money by selling bonds to the
private sector, including large institutional investors and
small retail investors. U.S. Treasury bonds fall into the
former group and savings bonds the latter. The United
States is not alone in selling small-denomination bonds to
retail investors; since the 1910s, Canada has offered its
residents a form of savings bonds.4 Generally, huge
demands for public debt, occasioned by wartime, have
given rise to the most concerted savings bond programs.
4
Brennan and Schwartz (1979) provide an introduction to
Canadian savings bonds as well as the savings bond offerings of
a number of European countries. For current information on
Canadian savings bonds, see http://www.csb.gc.ca/eng/
resources_faqs_details.asp?faq_category_ID=19 (visited Sept.
26, 2004).
Table 3. Median Value of Select Financial Assets Among Asset Holders by Income and Net Worth (2001)
Savings
Bonds
Certificates
of Deposit
Mutual
Funds Stocks
Transaction
Accounts
All
Financial
Assets
Percentile of Income
Less than 20 $1,000 $10,000 $21,000 $7,500 $900 $2,000
20-39.9 $600 $14,000 $24,000 $10,000 $1,900 $8,000
40-59.9 $500 $13,000 $24,000 $7,000 $2,900 $17,100
60-79.9 $1,000 $15,000 $30,000 $17,000 $5,300 $55,500
80-89.9 $1,000 $13,000 $28,000 $20,000 $9,500 $97,100
90-100 $2,000 $25,000 $87,500 $50,000 $26,000 $364,000
Percentile of net worth
Less than 25 $200 $1,500 $2,000 $1,300 $700 $1,300
25-49.9 $500 $500 $5,000 $3,200 $2,200 $10,600
50-74.9 $1,000 $11,500 $15,000 $8,300 $5,500 $53,100
75-89.9 $2,000 $20,000 $37,500 $25,600 $13,700 $201,700
90-100 $2,000 $40,000 $140,000 $122,000 $36,000 $707,400
Source: Aizcorbe, Kennickell, and Moore (2003). Medians represent holdings among those with non-zero holdings.

The earliest bond issue by the U.S. was conducted in 1776
to finance the Revolutionary War. Bonds were issued
again to finance the War of 1812, the Civil War, the
Spanish American War, and with the onset of World War
I the Treasury Department issued Liberty Bonds, mount-
ing extensive marketing campaigns to sell the bonds to
the general public (Cummings (1920)). The bond cam-
paign during World War II is the best known of those
efforts, though bonds were also offered in conjunction
with the Vietnam War and, soon after the terrorist attacks
in 2001, the government offered the existing EE bonds as
‘‘Patriot Bonds’’ to allow Americans to ‘‘express their
support for anti-terrorism efforts’’ (U.S. Department of
the Treasury (2002)).
During those wartime periods, bond sales were tied to
patriotism. World War I campaigns asked Americans to
‘‘buy the ‘Victorious Fifth’ Liberty Bonds the way our
boys fought in France — to the utmost’’ (Liberty Loan
Committee (1919)). World War II-era advertisements de-
clared, ‘‘War bonds mean bullets in the bellies of Hitler’s
hordes’’ (Blum (1976)).
The success of those mass appeals to patriotism was
predicated on bonds being accessible and affordable to
large numbers of Americans. Both the World War I and
World War II bond issues were designed to include small
savers. While the smallest denomination Liberty Bond
was $100, the Treasury also offered Savings Stamps for
$5, as well as the option to purchase Thrift Stamps in
increments of 25 cents that could then be redeemed for a
Savings Stamp (Zook (1920)). A similar system was put in
place for the World War II-era War Bonds. While the
smallest bond denomination was $25, Defense Stamps
were sold through post offices and schools for as little as
10 cents and were even given as change by retailers (U.S.
Department of the Treasury (1981, 1984)). Pasted in
albums, those stamps were redeemable for War Bonds.
The War Bonds campaign went further than Liberty
Bonds to appeal to small investors. During World War II,
the Treasury Department oriented its advertising to focus
on small savers, choosing popular actors and musicians
that the Treasury hoped would make the campaign
‘‘pluralistic and democratic in taste and spirit’’ (Blum
(1976)). In addition to more focused advertising, changes
to the terms of War Bonds made them more appealing to
those investors. The bonds were designed to be simple.
Unlike all previous government bond issues, they were
not marketable and were protected from theft (U.S.
Department of the Treasury (1984)).
Many of those changes to the bond program had
actually been put in place before the war. In 1935,
Treasury had introduced the Savings Bond (the basis for
the current program) with the intention that it ‘‘appeal
primarily to individuals with small amounts to invest’’
(U.S. Department of the Treasury (1981)). The Savings
Bond was not the first effort by the Treasury to encourage
small investors to save during a peacetime period. Fol-
lowing World War I and the Liberty Bond campaigns, the
Treasury decided to continue its promotion of bonds and
stamps. It stated that to:
Make war-taught thrift and the practice of saving
through lending to the Government a permanent
and happy habit of the American people, the
United States Treasury will conduct during 1919 an
intensive movement to promote wise spending, intelli-
gent saving, and safe investment emphasis added
(U.S. Department of the Treasury (1918)).
The campaign identified seven principal reasons to en-
courage Americans to save including: (1) ‘‘advance-
ment,’’ which was defined as savings for ‘‘a definite
concrete motive, such as buying a home . . . an education,
or training in trade, profession or art, or to give children
educational advantages,’’ (2) ‘‘motives of self interest’’
such as ‘‘saving for a rainy day,’’ and (3) ‘‘capitalizing
part of the worker’s earnings,’’ by ‘‘establishing the
family on ‘safety lane’ if not on ‘easy street’’’ (U.S.
Department of the Treasury (1918)). Against that back-
ground, it seems clear that the focus of savings bonds on
the small saver was by no means a new idea, but rather
drew inspiration from the earlier ‘‘thrift movement’’
Table 4. Minimum Initial Purchase Requirements Among Mutual Funds in the United States
Min = $0 Min < $100 Min < $250
Among all funds listed by Morningstar
Number allowing 1,292 1,402 1,785
Percent allowing 8% 9% 11%
Among the top 500 mutual funds by net assets
Number allowing 49 55 88
Among the top 100 index funds by net assets
Among the top 100 domestic stock funds by net assets
Among the top 100 money market funds by net assets
Source: Morningstar (2004) and imoneynet.com (2005).

while attempting to tailor the terms of the bonds more
precisely to the needs of small savers. However, even on
those new terms, the new savings bonds (also called baby
bonds) did not sell quickly. In his brief, but informative,
summary of the 1935 bond introduction, Blum details
how:
At first sales lagged, but they picked up gradually
under the influence of the Treasury’s promotional
activities, to which the Secretary gave continual
attention. By April 18, 1936, the Department had
sold savings bonds with a maturity value of $400
million. In 1937 [Secretary of the Treasury] Mor-
genthau enlisted the advertising agency of Sloan
and Bryan, and before the end of that year more
than 1,200,000 Americans had bought approxi-
mately 4½ million bonds with a total maturity
value of over $1 billion (Blum (1959)).
Americans planned to use those early savings bonds for
many of the same things that low-income Americans save
for now, first and foremost, for emergencies (Blum
(1959)). The intent of the program was not constrained to
just providing a savings vehicle. The so-called baby bond
allowed all Americans the opportunity to invest even
small amounts of money in a government-backed secu-
rity, which then-Secretary of the Treasury Morgenthau
saw as a way to:
Democratize public finance in the United States. We
in the Treasury wanted to give every American a
direct personal stake in the maintenance of sound
Federal Finance. Every man and woman who
owned a Government Bond, we believed, would
serve as a bulwark against the constant threats to
Uncle Sam’s pocketbook from pressure blocs and
special-interest groups. In short, we wanted the
ownership of America to be in the hands of the
American people (Morgenthau, (1944)).
In theory, the peacetime promotion of savings bonds
as a valuable savings vehicle with both public and
private benefits continues. From the Treasury’s Web site,
we can gather its ‘‘pitch’’ to would-be buyers of bonds
focuses on the private benefits of owning bonds:
There’s no time like today to begin saving to
provide for a secure tomorrow. Whether you’re
saving for a new home, car, vacation, education,
retirement, or for a rainy day, U.S. Savings Bonds
can help you reach your goals with safety, market-
based yields, and tax benefits (U.S. Department of
the Treasury (2004a)).
But the savings bond program, as it exists today, does not
seem to live up to that rhetoric, as we discuss below.
Recent policy decisions reveal much about the debate
over savings bonds as merely one way to raise money for
the Treasury versus their unique ability to help families
participate in America and save for their future. As we
keep score, the idea that savings bonds are an important
tool for family savings seems to be losing.
B. Recent Debates Around the Savings Bond
Program and Program Changes
Savings bonds remain an attractive investment for
American families. In Appendix A we provide details on
the structure and returns of bonds today. In brief, the
bonds offer small investors the ability to earn fairly
competitive tax advantage returns on a security with no
credit risk and no principal loss due to interest rate
exposure, in exchange for a slightly lower yield relative
to large denomination bonds and possible loss of some
interest in the event the investor needs to liquidate her
holdings before five years. As we argue below and
discuss in Appendix B, the ongoing persistence of the
savings bond program is testimony to their attractiveness
to investors.
As we noted, both current and past statements to
consumers about savings bonds suggest that Treasury is
committed to making them an integral part of household
savings. Unfortunately, the changes to the program over
the past two years seem contrary to that goal. Three of
those changes may make it more difficult for small
investors and those least well served by the financial
service community to buy bonds and save for the future.
More generally, the structure of the program seems to do
little to promote the sale of the bonds.
On January 17, 2003, Treasury promulgated a rule that
amends CFR section 31 to increase the minimum holding
Table 5. Average Savings Account Fees and Minimum Balance Requirements Nationally and in the 10 Largest
Consolidated Metropolitan Statistical Areas (CMSAs) (2001)
Minimum
Balance to
Open Account Monthly Fee
Minimum
Balance to
Avoid
Monthly Fee Annual Fee
Annual Fee as
a Percent of
Min. Balance
Requirement
All Respondent Banks $97 $2.20 $158 $26 27%
New York $267 $3.10 $343 $37 14%
Los Angeles $295 $2.80 $360 $34 11%
Chicago $122 $3.50 $207 $43 35%
District of Columbia $100 $3.20 $152 $38 38%
San Francisco $275 $2.80 $486 $34 12%
Boston $44 $2.70 $235 $33 75%
Dallas $147 $3.20 $198 $38 26%
Average 10 Largest CMSAs $179 $2.90 $268 $35 20%
Source: Board of Governors of the Federal Reserve (2002).

period before redemption for Series EE and I Bonds from
6 months to 12 months for all newly issued bonds (31
CFR part 21 (2003)). In rare cases, savings bonds may be
redeemed before 12 months, but generally only in the
event of a natural disaster (U.S. Department of the
Treasury (2004b)). That increase in the minimum holding
period essentially limits the liquidity of a bondholder’s
investment, which is most important for LMI savers who
might be confronted with a family emergency that re-
quires that they liquidate their bonds within a year. By
changing the minimum initial holding periods, the Trea-
sury makes is bonds less attractive for low-income fami-
lies.
The effect that policy change seems likely to have on
small investors, particularly those with limited means,
appears to be unintended. Rather, that policy shift arises
out of concern over rising numbers of bondholders
keeping their bonds for only the minimum holding
period to maximize their returns in the short term.
Industry observers have noted that given the low interest
rates available on such investment products as CDs or
money market funds, individuals have been purchasing
series EE and I bonds, holding them for six months,
paying the interest penalty for cashing out early, but still
clearing a higher rate of interest than they might find
elsewhere (Pender (2003)). Treasury cited that behavior as
the primary factor in increasing the minimum holding
period. Officials argued that this amounted to ‘‘taking
advantage of the current spread between savings bond
returns and historically low short-term interest rates,’’ an
activity they believe contravenes the nature of the sav-
ings bond as a long-term investment vehicle (U.S. De-
partment of the Treasury (2003a)).
Second, marketing efforts for savings bonds have been
eliminated. Congress failed to authorize $22.4 million to
fund the Bureau of Public Debt’s marketing efforts and
on September 30, 2003, Treasury closed all 41 regional
savings bond marketing offices and cut 135 jobs. This
funding cut represents the final blow to what was once a
large and effective marketing strategy. Following the
Liberty Bond marketing campaign, as part of the ‘‘thrift
movement’’ Treasury continued to advertise bonds,
working through existing organizations such as schools,
‘‘women’s organizations,’’ unions, and the Department of
Agriculture’s farming constituency (Zook (1920)). Mor-
genthau’s advertising campaign for baby bonds contin-
ued the marketing of bonds through the 1930s, preceding
the World War II-era expansion of advertising in print
and radio (Blum (1959)). Much of that wartime advertis-
ing was free to the government, provided as a volunteer
service through the Advertising Council beginning in
1942. Over the next 30 years, the Advertising Council
arranged for contributions of advertising space and ser-
vices worth hundreds of millions of dollars (U.S. Depart-
ment of the Treasury, Treasury Annual Report (1950-
1979)). In 1970 Treasury discontinued the Savings Stamps
program, which it noted was one of ‘‘the bond program’s
most interesting (and promotable) features’’ (U.S. Depart-
ment of the Treasury (1984)). The Advertising Council
ended its affiliation with the bond program in 1980,
leaving the job of marketing bonds solely to the Treasury
(Advertising Council (2004)). In 1999 Treasury began a
marketing campaign for the newly introduced I bonds.
However, that year the bureau spent only $2.1 million on
the campaign directly and received just $13 million in
donated advertising, far short of the $73 million it
received in donated advertising in 1975 (James (2000) and
U.S. Department of the Treasury, Treasury Annual Report
(1975)).
Third, while not a change in policy, the current pro-
gram provides little or no incentive for banks or employ-
ers to sell bonds. Nominally, the existing distribution
outlets for bonds are quite extensive, including financial
institutions, employers, and the TreasuryDirect system.
There are currently more than 40,000 financial institu-
tions (banks, credit unions, and other depositories) eli-
gible to issue savings bonds (U.S. Department of the
Treasury (2004b)). In principle, someone can go up to a
teller and ask to buy a bond. As anecdotal evidence, one
of us tried to buy a savings bond in this way and had to
go to a few different bank branches before the tellers
could find the necessary forms, an experience similar to
that detailed by James T. Arnold Consultants (1999) in
their report on the savings bonds program. That lack of
interest in selling bonds may reflect the profit potential
available to a bank selling bonds. Treasury pays banks
fees of $0.50-$0.85 per purchase to sell bonds and the
bank receives no other revenue from the transaction.5 In
off-the-record discussions, bank personnel have asserted
that those payments cover less than 25 percent of the cost
of processing a savings bond purchase transaction. The
results of an in-house evaluation at one large national
bank showed that there were 22 steps and four different
employees involved with the processing of a bond pur-
chase. Given those high costs and miniscule payments,
our individual experience is hardly surprising, as are
banks’ disinterest in the bond program.
Savings bonds can also be purchased via the Payroll
Savings Plan, which Treasury reports as available
through some 40,000 employer locations (U.S. Depart-
ment of the Treasury (2004c)).6 Again, by way of anec-
dote, one of us called our employer to ask about this
program and waited weeks before hearing back about
this option. Searching the University intranet, the term
‘‘savings bonds’’ yielded no hits, even though the pro-
gram was officially offered.
Fourth, while it is merely a matter of taste, we may not
be alone in thinking that the ‘‘front door’’ to savings
bonds, the U.S. Treasury’s savings bond Web site,7 is
complicated and confusing for consumers (though the
BPD has now embarked on a redesign of the site geared
5
Fees paid to banks vary depending on the exact role the
bank plays in the issuing process. Banks that process savings
bond orders electronically receive $0.85 per bond while banks
that submit paper forms receive only $0.50 per purchase (U.S.
Department of the Treasury (2000), Bureau of Public Debt
(2005), private correspondence with authors).
6
This option allows employees to allocate a portion of each
paycheck toward the purchase of savings bonds. Participating
employees are not required to allocate sufficient funds each pay
period for the purchase of an entire bond, but rather can allot
smaller amounts that are held until reaching the value of the
desired bond (U.S. Department of the Treasury (1993, 2004d).
7
http://www.publicdebt.treas.gov/sav/sav.htm.

toward promoting the online TreasuryDirect system).
That is particularly important in light of the fact that
Treasury has eliminated its marketing activities for these
bonds. Financial service executives are keenly aware that
cutting all marketing from a product, even an older
product, does not encourage its growth. Indeed, commer-
cial firms use that method to quietly ‘‘kill’’ products.
Fifth, on May 8, 2003, Treasury published a final rule
on the ‘‘New Treasury Direct System.’’ That rule made
Series EE bonds available through the TreasuryDirect
system (Series I bonds were already available) (31 CFR
part 315 (2003)). The new system represents the latest
incarnation of TreasuryDirect, which was originally used
for selling marketable Treasury securities (U.S. GAO
(2003)). In essence, Treasury proposes that a $50 savings
bond investor follow the same procedures as a $1 million
investor in Treasury bills. The Department of the Trea-
sury seeks to eventually completely phase out paper
bonds (Block (2003)) and to that end have begun closing
down certain aspects of the savings bond program, such
as promotional giveaways of bonds, which rely on paper
bonds. Treasury also recently stopped the practice of
allowing savers to buy bonds using credit cards. Those
changes seem to have the effect of reducing the access of
low-income families to savings bonds and depressing
demand of their sale overall. By moving toward an
online-only system of savings bonds distribution, Trea-
sury risks closing out those individuals without Internet
access. Furthermore, to participate in TreasuryDirect,
Treasury requires users to have a bank account and
routing number. That distribution method effectively
disenfranchises the people living in the approximately 10
million unbanked households in the United States
(Azicorbe, Kennickell, and Moore (2003) and U.S. Census
(2002)). While there have been a few small encouraging
pilot programs in BPD to experiment with making Trea-
suryDirect more user-friendly for poorer customers, the
overall direction of current policy seems to make bonds
less accessible to consumers.8
Critics of the savings bonds program, such as Rep.
Ernest J. Istook Jr., R-Okla., charge that the expense of
administering the U.S. savings bond program is dispro-
portionate to the amount of federal debt covered by the
program. Those individuals contend that while savings
bonds represent only 3 percent of the federal debt that is
owned by the public, some three-quarters of the budget
of the BPD is dedicated to administering the program
(Berry (2003)). Thus, they argue that the costs of the
savings bond program must be radically reduced. Istook
summed up that perspective with the statement:
Savings Bonds no longer help Uncle Sam; instead
they cost him money. . . . Telling citizens that they
help America by buying Savings Bonds, rather than
admitting they have become the most expensive
way for our government to borrow, is misplaced
patriotism (Block (2003)).
However, some experts have questioned that claim. In
testimony, the commissioner of the public debt described
calculations that showed that series EE and I savings
bonds were less costly than Treasury marketable securi-
ties.9
In May 2005, Treasury substantially changed the terms
of EE bonds. Instead of having interest on those bonds
float with the prevailing five-year Treasury rate, they
became fixed-rate bonds, with their interest rate set for
the life of the bond at the time of purchase.10 While that
may be prudent debt management policy from the per-
spective of lowering the government’s cost of borrowing,
consumers have responded negatively.11 We would hope
that policymakers took into consideration the effect that
decision might have in the usefulness of bonds to help
families meet their savings goals.
Focusing decisions of that sort solely on the cost of debt
to the federal government misses a larger issue; the
savings bond program was not created only to provide a
particularly low-cost means of financing the federal debt.
Rather, the original rationale for the savings bond pro-
gram was to provide a way for individuals of limited
means to invest small amounts of money and to allow
more Americans to become financially invested in gov-
ernment. While that is not to say that the cost of the
savings bonds program should be disregarded, this cur-
rent debate seems to overlook one real public policy
purpose of savings bonds: helping families save.
And so while none of those recent developments (a
longer holding period, elimination of marketing, and
changes to the bond buying process) or the ongoing
problems of few incentives to sell bonds or a lackluster
public image seem intentionally designed to discourage
8
Working with a local bank partner in West Virginia, the
bureau has rolled out ‘‘Over the Counter Direct’’ (OTC Direct).
The program is designed to allow savings bond customers to
continue to purchase bonds through bank branches, while
substantially reducing the processing costs for banks. Under the
program, a customer arrives at the bank and dictates her order
to a bank employee who enters it into the OTC Direct Web site.
Clients receive a paper receipt at the end of the transaction and
then generally are mailed their bonds (in paper form) one to two
weeks later. In that sense, OTC Direct represents an intermedi-
ate step; the processing is electronic, while the issuing is
paper-based. While not formally provided for in the system, the
local bank partner has developed protocols to accommodate the
unbanked and those who lack Web access. For instance, the local
branch manager will accept currency from an unbanked bond
buyer, set up a limited access escrow account, deposit the
currency into the account, and affect the debit from the escrow
account to the BPD. When bond buyers lack an email address,
the branch manager has used his own. A second pilot program,
with Bank of America, placed kiosks that could be used to buy
bonds in branch lobbies. The kiosks were linked to the Treasury
Direct Web site, and thus enabled bond buyers without their
own method of internet access to purchase bonds. However, the
design of this initiative was such that the unbanked were still
precluded from purchasing bonds.
9
See testimony by Van Zeck (Zeck (2002)); however, a recent
GAO study requested by Istook cast doubt on the calculations
that Treasury used to estimate the costs of the program (U.S.
GAO (2003)).
10
See http://www.publicdebt.treas.gov/com/comeefixed
rate.htm.
11
See http://www.bankrate.com/brm/news/sav/20050407
a1.asp for one set of responses.
(Footnote continued in next column.)

LMI families from buying bonds, their likely effect is to
make the bonds less attractive to own, more difficult to
learn about, and harder to buy.
Those decisions about bonds were made on the basis
of the costs of raising money through savings bonds
versus through large-denomination Treasury bills, notes,
and bonds.12 That discussion, while appropriate, seems
to lose sight of the fact that savings bonds also have
served — and can serve — another purpose: to help
families save. The proposals we outline below are in-
tended to reinvigorate that purpose in a way that may
make savings bonds even more efficient to administer.
IV. Reinventing the Savings Bond
The fundamental savings bond structure is sound. As
a ‘‘brand,’’ it is impeccable. The I bond experience has
shown that tinkering with the existing savings bond
structure can broaden its appeal while serving a valuable
public policy purpose. Our proposals are designed to
make the savings bond a valuable tool for LMI families,
while making savings bonds a more efficient debt man-
agement tool for the Treasury. Our goal is not to have
savings bonds substitute for or crowd out private invest-
ment vehicles, but rather to provide a convenient, effi-
cient, portable, national savings platform available to all
families.
A. Reduce the Required Holding Period for
Bondholders Facing Financial Emergencies
While Treasury legitimately lengthened the savings
bond holding period to discourage investors seeking to
arbitrage the differential between savings bond rates and
money market rates, the lengthening of the holding
period makes bonds less attractive to LMI families. The
current minimum required holding period of 12 months
is a substantial increase from the original 60 days re-
quired of baby bond holders. The longer period essen-
tially requires investors to commit to saving for at least
one year. A new BPD program suggests that this may not
be a problem for some investors. In an effort to encourage
bond holders to redeem savings bonds that have passed
maturity, the BPD is providing a search service (called
‘‘Treasury Hunt’’) to find the holders of those 33 million
bonds worth $13.5 billion (Lagomarsino (2005)). The
program reveals that bonds are an extremely efficient
mechanism to encourage long-term saving because they
have an ‘‘out of sight, out of mind’’ quality — perhaps
too much so. So, while many small investors may intend
to save for the long term, and many may have no trouble
doing so, the new extended commitment could still be
particularly difficult for LMI families in that they would
be prohibited from drawing on the funds even if faced
with financial emergency.
If we want to encourage savings bond use by LMI
families, Treasury could either (a) exempt small with-
drawals from the required holding periods or (b) set up
and publicize existing simple emergency withdrawal
rules. Under the first rule, Treasury could allow a holder
to redeem some amount (say $5,000 per year) earlier than
12 months, with or without interest penalty. While that
design would most precisely address the need for emer-
gency redemption, it could be difficult to enforce as
redeeming banks do not have a real-time link to BPD
records and so a determined bondholder could conceiv-
ably ‘‘game the system’’ by redeeming $5,000 bundles of
bonds at several different banks. Alternatively, while
current rules allow low-income bondholders who find
themselves in a natural disaster or financial emergency to
redeem their bonds early, that latter provision receives
virtually no publicity. The BPD does publicize the rule
that allows bondholders who have been affected by
natural disasters to redeem their bonds early. Were the
BPD to provide a similar level of disclosure of the
financial emergency rules, LMI savers might be encour-
aged to buy savings bonds.
Whether by setting some low limit of allowable early
redemptions for all, or merely publicizing existing emer-
gency withdrawal rules, it seems possible to meet the
emergency needs of LMI savers while continuing to
discourage arbitrage activity.
B. Make Savings Bonds Available to Tax Refund
Recipients
The IRS allows filers to direct nominal sums to fund-
ing elections through the Federal Election Campaign
Fund and permits refund recipients to direct their re-
funds to pay future estimated taxes. We propose that
taxpayers be able to direct that some of their refunds be
invested in savings bonds. The simplest implementation
of this system — merely requiring one additional line on
Form 1040 — would permit the refund recipient to select
the series (I or EE) and the amount; the bonds would be
issued in the primary filer’s name. Slightly more elabo-
rate schemes might allow the filer to buy multiple series
of bonds, buy them for other beneficiaries (for example,
children), or allow taxpayers not receiving refunds to buy
bonds at the time of paying their taxes.13
The idea of letting refund recipients take their refund
in the form of savings bonds is not a radical idea, but
rather an old one. Between 1962 and 1968, the IRS
allowed refund recipients to purchase savings bonds
with their refunds. Filers directed less than 1 percent of
refunds to bond purchase during that period (Internal
Revenue Service (1962-1968)). On its face, it might appear
that allowing filers to purchase savings bonds with their
refunds has little potential, but we feel that historical
experience may substantially underestimate the opportu-
nity to build savings at tax time via our refund-based
bond sales for two reasons. First, the size of low-income
filers’ tax refunds has increased from an average of $636
in 1964 (in 2001 dollars) to $1,415 in 2001, allowing more
filers to put a part of their refund aside as savings
12
For a cost-based view of the savings bond program from
the perspective of the BPD, see U.S. Department of the Treasury
(2002). For an opposing view also from that cost-based perspec-
tive, see GAO (2003).
13
Our proposal would allow taxpayers to purchase bonds
with after-tax dollars, so it would have no implications for tax
revenues.

(Internal Revenue Service (1964, 2001)).14 Those refunds
tend to be concentrated among low-income families, for
whom we would like to stimulate savings. Second, the
historical experiment was an all-or-nothing program — it
did not allow refund recipients to direct only a portion of
their refunds to bonds. We expect our proposal will be
more appealing because filers would be able to split their
refunds and direct only a portion towards savings bonds
while receiving the remainder for current expenses.
By allowing that option, Treasury would enable low-
income filers to couple a large cash infusion with the
opportunity to invest in savings bonds. Perhaps the
largest single pool of money on which low-income fami-
lies can draw for asset building and investment is the
more than $78 billion in refundable tax credits made
available through federal and state government each year
(Internal Revenue Service (2001)). Programs across the
country have helped low-income taxpayers build assets
by allowing filers to open savings accounts and indi-
vidual development accounts when they have their taxes
prepared. A new program in Tulsa, Okla. run by the
Community Action Project of Tulsa County and D2D (a
Boston-based non-profit organization) has allowed filers
to split their refunds, committing some to savings and
receiving the remainder as a check. That program al-
lowed families to precommit to saving their refunds,
instead of having to make a saving decision when the
refund was in hand and temptation to spend it was
strong. While those small sample results are difficult to
extrapolate, the program seemed to increase savings
initially and families reported that the program helped
them reach their financial goals.
Since the short-lived bond-buying program in the
1960s, the BPD has introduced other initiatives to encour-
age tax refund recipients to purchase bonds. The first of
those, beginning in the 1980s, inserted marketing mate-
rials along with the refund checks sent to refund recipi-
ents. Though only limited data has been collected, it
appears that those mailings were sent at random points
throughout the tax season (essentially depending on
availability as the BPD competed for ‘‘envelope space’’
with other agencies) and that no effort was made to
segment the market, with all refund recipients (low-
income and higher-income) receiving the materials. In all,
the BPD estimates that between 1988 and 1993 it sent 111
million solicitations with a response rate of a little less
than 0.1 percent. While that rate may appear low, it is
comparable to the 0.4 percent response rate on credit card
mailings and some program managers at the BPD
deemed the mailings cost effective (Anonymous (2004)).
Considering that the refund recipient had to take a
number of steps to effect the bond transaction (cash the
refund and so forth) those results are in some sense fairly
encouraging.
A second related venture was tried for the first time
during the tax season 2004. The BPD partnered with a
volunteer income tax preparation (VITA) site in West
Virginia to try to interest low-income refund recipients in
using the TreasuryDirect system. The tax site was located
in a public library and was open for approximately 12
hours per week during tax season. In 2004 the site served
approximately 500 people. The program consisted of
playing a PowerPoint presentation in the waiting area of
the free tax-preparation site and making available bro-
chures describing the TreasuryDirect system. Informal
evaluation by tax counselors who observed the site
suggests that interest was extremely limited and that
most filers were preoccupied with ensuring that they
held their place in line and were able to get their taxes
completed quickly.
While both of those programs attempted to link tax
refunds with savings, they did so primarily through
advertising, not through any mechanism that would
make savings easier. The onus is still on the refund
recipient to receive the funds, convert them to cash (or
personal check), fill out a purchase order, and obtain the
bonds. In the case of the 2004 experiment, the refund
recipient had to set up a TreasuryDirect account, which
would involve having a bank account, and so on. While
those programs reminded filers that savings is a good
idea, they did not make saving simple.
We remain optimistic, in part because of data collected
during the Tulsa experiment described above. While the
experiment did not offer refund recipients the option of
receiving savings bonds, we surveyed them on their
interest in various options. Roughly 24 percent of partici-
pants expressed an interest in savings bonds and nearly
three times as large a fraction were interested when the
terms of savings bonds were explained (Beverly,
Schneider, and Tufano (2004)). Our sample is too small to
draw a reliable inference from that data, but it certainly
suggests that the concept of offering savings bonds is not
completely ungrounded. Currently, a family wanting to
use its refund to buy savings bonds would have to
receive the refund, possibly pay a check casher to convert
the refund to cash, make an active decision to buy the
bond, and go online or to a bank to complete the
paperwork. Under our proposal, the filer would merely
indicate the series and amount, the transaction would be
completed, and the money would be safely removed
from the temptation of spending. Most importantly,
because the government does not require savings bond
buyers to pass a ChexSystem hurdle, that would open up
savings to possibly millions of families excluded from
opening bank accounts.
While we hope that refund recipients could enjoy a
larger menu of savings products than just bonds, offering
savings bonds seamlessly on the tax form has practical
advantages over offering other products at tax time. By
putting a savings option on the tax form, all filers —
including self-filers — could be reminded that tax time is
potentially savings time. Paid and volunteer tax sites
wishing to offer other savings options on-site would face
a few practical limitations. First, certain products (like
mutual funds) could only be offered by licensed broker-
dealers, which would require either on-site integration of
a sales force or putting the client in touch via phone or
other means with an appropriately licensed agent. More
generally, return preparers — especially volunteer sites
— would be operationally challenged by the prospect of
14
We define LMI filers as those with incomes of less than
$30,000 in 2001 or less than $5,000 in the period from 1962-1968
(which is approximately $30,000 in 2001 dollars).

opening accounts on-site. However, merely asking the
question: ‘‘How much of your refund — if any — would
you like in savings bonds?’’ could be incorporated rela-
tively easily in the process.
Not only would a refund-driven savings bond pro-
gram make saving easier for families, it would likely
reduce the cost of marketing and administering the
savings bond program for Treasury. All of the informa-
tion needed to purchase a bond is already on the filer’s
tax return, so there would be less likelihood of error. It
should not require substantial additional forms, but
merely a single additional line or two on Form 1040.
Treasury would not need to pay banks fees of $0.50-$0.85
per purchase to sell bonds.15 Further, the refund money
would never leave the federal government. If subsequent
investigation uncovered some tax compliance problem
for a refund recipient, some of the contested funds would
be easily traceable. Given annual LMI refunds of $78
billion, savings bond sales could increase by 9.8 percent
for each 1 percent of those refunds captured.16
Ultimately, whether refund recipients are interested in
buying bonds will be known only if one makes a serious
attempt to market to them at refund time. We are
attempting to launch an experiment this coming tax
season that will test that proposition.
C. Enlist Private-Sector Social Marketing for
Savings Bonds
Right now, banks and employers have little incentive
to market savings bonds. If an account is likely to be
profitable, a bank would rather open the account than
sell the person a savings bond. If an account is unlikely to
be profitable, the bank is not likely to expend much
energy selling bonds to earn $0.50 or $0.85. With a
reinvented savings bond program, Treasury could lever-
age other private-sector marketing.
First, one can imagine a very simple advertising
program for the tax-based savings bond program focus-
ing its message on the simplicity of buying bonds at tax
time and the safety of savings bond investments. We
envision a ‘‘RefundSaver’’ program. Groups like the
Consumer Federation of America and America Saves
might be enlisted to join in the public service effort if the
message were sufficiently simple.17
With a tax-centered savings bond marketing program,
the IRS could leverage paid and volunteer tax preparers
to market bonds. If those tax preparers could enhance
their ‘‘value proposition’’ they have with their clients by
offering them a valuable asset-building service at tax
time, they might have a strong incentive to participate,
possibly without any compensation. If Treasury paid
preparers the same amount that it offered to banks selling
bonds, that would create even greater incentives for the
preparers to offer the bonds, although it might create
some perverse incentives for preparers as well.
D. Consider Savings Bonds in the Context of a
Family’s Financial Life Cycle
As they are currently set up, savings bonds are seen as
the means for long-term savings. Bonds are bought and
presumably redeemed years (if not decades) later. Trea-
sury data partially bears out this assumption. Of the
bonds redeemed between 1950 and 1980, roughly half
were redeemed before maturity. Through the mid-1970s,
redemptions of unmatured bonds made up less than half
of all bond redemptions (41 percent on average). In the
late 1970s that ratio changed, with unmatured bonds
making up an increasingly large share of redemptions
(up to 74 percent in 1981, the last year for which data is
reported). However, even without that increase in re-
demptions (perhaps brought on by the inflationary envi-
ronment of the late 1970s) early redemptions seem to
have been quite frequent. That behavior is in line with the
use of bonds as described by Treasury in the 1950s, as a
means of ‘‘setting aside liquid savings out of current
income’’ (U.S. Department of the Treasury, Treasury
Annual Report (1957)). Under our proposal, savings
bonds would be a savings vehicle for LMI families who
have small balances and low risk tolerances. Over time,
those families might grow to have larger balances and
greater tolerance for risk; also, their investing horizons
might lengthen. At that time, our savings bond investors
might find that bonds are no longer the ideal investment
vehicle, and our reinvented savings bonds should recog-
nize that eventuality.
We propose that Treasury study the possibility of
allowing savings bond holders to roll over their savings
bonds into other investment vehicles. In the simplest
form, Treasury would allow families to move their sav-
ings bonds directly into other investments. Those invest-
ments might be products offered by the private sector
(mutual funds, certificates of deposits, and so forth). If
the proposals to privatize Social Security became reality,
those rollovers could be into the new private accounts.
Finally, it might be possible to roll over savings bond
amounts into other tax-deferred accounts, although that
concept would add complexity, as one would need to
consider the ramifications of mixing after-tax and pretax
investments. The proposal for retirement savings bonds
(R bonds) takes a related approach. Those bonds would
allow employers to set aside small amounts of retirement
savings for employees at a lower cost than would be
incurred by using traditional pension systems. R-bonds
would be specifically earmarked for retirement and could
only be rolled over into an IRA (Financial Services
Roundtable (2004)).
15
Fees paid to banks vary depending on the exact role the
bank plays in the issuing process. Banks that accept bond orders
and payment from customers but send those materials to
regional Federal Reserve Banks for final processing are paid
$0.50 per purchase. Banks that do this final level of processing
themselves — inscription — receive $0.85 per bond issue (U.S.
Department of the Treasury (2000)).
16
Sales of EE and I bonds through payroll and over-the-
counter were $7.9 billion in 2004. Total refunds to LMI filers in
2001 were $78 billion. Each $780 million in refunds captured
would be a 9.8 percent increase in savings bonds sales.
17
The BPD commissioned Arnold Consultants to prepare a
report on marketing strategy in 1999. They also cite the potential
for a relationship between the BPD and nonprofit private-sector
groups dedicated to encouraging savings (James T. Arnold
Consultants (1999)).

E. Make the Process of Buying Savings Bonds
More User-Friendly
There has been a shift in the type of outlets used to
distribute U.S. savings bonds. While there are still more
than 40,000 locations at which individuals can purchase
savings bonds, those are now exclusively financial insti-
tutions. Post offices, the original distribution mode for
baby bonds, no longer sell bonds. That shift is of particu-
lar concern to low-income small investors. Over the past
30 years, a number of studies have documented the
relationship between bank closings and the racial and
economic makeup of certain neighborhoods. In a study of
five large U.S. cities, Caskey (1994) finds that neighbor-
hoods with large African-American or Hispanic popula-
tions are less likely to have a bank branch and that in
several of the cities, ‘‘low-income communities are sig-
nificantly less likely to have a local bank than are other
communities.’’ Post offices, on the other hand, remain a
ubiquitous feature of most neighborhoods and could
again serve as an ideal location for the sale of savings
bonds.
Our tax-intermediated bond program should make
savings bonds more accessible for most Americans. In
addition, just as Treasury allows qualified employers to
offer savings bonds, retailers like Wal-Mart or AFS pro-
viders like ACE might prove to be effective outlets to
reach LMI bond buyers. Further, Treasury could work
with local public libraries and community-based organi-
zations to facilitate access to TreasuryDirect for the
millions of Americans without Internet access.
* * * * *
Our proposals are very much in the spirit of reinvent-
ing the savings bond. As a business proposition, one
never wants to kill a valuable brand. We suspect that
savings bonds — conjuring up images of old-fashioned
savings — may be one of the government’s least recog-
nized treasures. It was — and can be again — a valuable
device to increase household savings while simulta-
neously becoming a more efficient debt management
tool. The U.S. savings bond program, when first intro-
duced in the early 20th century, was a tremendous
innovation that created a new class of investors and
enabled millions of Americans to buy homes, durable
goods, and pursue higher education (Samuel (1997)). In
the same way, a revitalized savings bond program, aimed
squarely at serving LMI families, can again become a
pillar of family savings.
In mid-September 2005, Sens. Mary Landrieu, D-La.,
and David Vitter, R-La., proposed a renewed savings
bond marketing effort, aimed at raising funds for the
reconstruction of areas damaged by hurricane Katrina
(Stone (2005)). The senators alluded to the success of the
1940s War Bond program as inspiration. We think they
should focus on bonds not only to raise funds to rebuild
infrastructure and homes but also to use the opportunity
to help families rebuild their financial lives. These re-
building bonds could be used to help families affected by
the hurricane to save and put their finances in order,
perhaps by offering preferred rates on the bonds or by
offering matching on all bond purchases. Nonaffected
families could simply use the occasion to save for their
futures or emergencies. A national bond campaign might
emphasize that bond purchasers can rebuild not only
critical infrastructure, homes, and businesses, but also
families’ savings.
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www.publicdebt.treas.gov/mar/marprs.htm (last vis-
ited Oct. 12, 2004).
United States Department of the Treasury Bureau of
Public Debt, 2004d, ‘‘FAQs: Buying Savings Bonds
Through Payroll Savings’’ http://www.publicdebt.
treas.gov.
United States Department of the Treasury, Bureau of
Public Debt, 2005, Current Rates (through April 2005),
http://www.publicdebt.treas.gov/sav/sav.htm.
UnitedStatesDepartmentoftheTreasury,BureauofPublic
Debt, 2005, ‘‘EE Bonds Fixed Rate Frequently Asked
Questions,’’ http://www.treasurydirect.gov/indiv/
research/indepth/eefixedratefaqs.htm (last visited
June 23, 2005).
Unites States Department of the Treasury, Bureau of
Public Debt, 2005, private correspondence with au-
thors, on file with authors.
United States Government Accounting Office, 2003, Sav-
ings Bonds: Actions Needed to Increase the Reliability of
Cost-Effectiveness Measures (United States Government
Accounting Office, Washington).
Zeck, Van, 2002, Testimony before House Subcommittee
on Treasury, Postal Service, and General Government
Appropriations, Mar. 20, 2002.
Zook, George F., 1920, ‘‘Thrift in the United States,’’ in
The New American Thrift, ed. Roy G. Blakey, Annals of
the American Academy of Political and Social Science,
vol. 87.
(Appendixes begin on next page.)

Appendix A: Savings Bonds Today
Series EE and I bonds are the two savings bonds
products now available (Table 6 summarizes the key
features of the bonds in comparison to other financial
products).18 Both are accrual bonds; interest payments
accumulate and are payable on redemption of the bond.
Series EE bonds in paper form are sold at 50 percent of
their face value (a $100 bond sells for $50) and, until May
2005, accumulated interest at a variable ‘‘market rate’’
reset semiannually as 90 percent of the five-year Treasury
securities yield on average over the prior six-month
period. However, as of May, the interest rate structure for
EE bonds changed. Under the new rules, EE bonds earn
a fixed rate of interest, set biannually in May and
October. The rate is based on the 10-year Treasury bond
yield, but the precise rate will be set ‘‘administratively’’
taking into account the tax privileges of savings bonds
and the early redemption option.19 EE bonds are guaran-
teed to reach face value after 20 years, but continue to
earn interest for an additional 10 years before the bond
reaches final maturity (U.S. Department of the Treasury
(2003b)). Inflation-indexed I bonds are sold at face value
and accumulate interest at an inflation-adjusted rate for
30 years (Treasury (2003c)).20 In terms of their basic
economic structure of delivering fixed rates, EE savings
bonds resemble fixed-rate certificates of deposit (CDs).
Backed by the ‘‘full faith and credit of the United
States Government,’’ savings bonds have less credit risk
than any private-sector investment. (Bank accounts are
protected by the FDIC only up to $100,000 per person.)
Holders face no principal loss, as rises in rates do not lead
to a revaluation of principal because the holder may
redeem them without penalty (after a certain point). Also,
interest on I bonds is indexed to inflation rates.
The holder faces substantial short-term liquidity risk,
as current rules do not allow a bond to be redeemed
earlier than one year from the date of purchase (although
that requirement may be waived in rare circumstances
involving natural disasters or, on a case-by-case basis,
individual financial problems). Bonds redeemed less
than five years from the date of purchase are subject to a
penalty equal to three months of interest. In terms of
liquidity risk, savings bonds are similar to certificates of
deposit more so than to money market mutual fund or
money market demand account accounts.
Interest earnings on EE and I Bonds are exempt from
state and local taxes, but federal taxes must be paid either
when the bond is redeemed, 30 years from the date of
18
The current income bond, the Series HH, was discontinued
in August 2004 (United States Department of the Treasury,
Bureau of Public Debt, Series HH/H Bonds, available online at
http://www.publicdebt.treas.gov).
19
United States Department of the Treasury, Bureau of Public
Debt, ‘‘EE Bonds Fixed Rate Frequently Asked Questions,’’
available online at http://www.treasurydirect.gov/indiv/
research/indepth/eefixedratefaqs.htm, last visited June 23,
2005.
20
This inflation-adjusted rate is determined by a formula that
is essentially the sum of a fixed real rate (set on the date of the
bond issue) and the lagging rate of CPI inflation.
Table 6. Attributes of Common Savings Vehicles, February 9, 2005
Savings Bonds Savings Accounts Certificates of
Deposit
Money Market
Mutual Funds
Yield Series EE: 3.25%
(2.44%)*
Series I: 3.67%
(2.75%*)
1.59% 1-month: 1.16%
3-month: 1.75%
6-month: 2.16%
Taxable: 1.75%
Nontaxable: 1.25%
Preferential Tax
Treatment
Federal taxes deferred
until time of
redemption. State and
local tax-exempt.
None None None
Liquidity Required 12-month
holding period.
Penalty for
redemption before five
years equal to loss of
prior three months of
interest.
On demand Penalties for early
withdrawal vary: all
interest on 30-day CD,
3 months on 18-month
CD, 6 months on
2-year or longer CD.
On demand, but fees
are assessed upon exit
from fund.
Risk ‘‘Full faith and credit
of U.S.’’ No principal
risk.
FDIC insurance to
$100,000
FDIC insurance to
$100,000
Risk to principal,
although historically
absent for Money
market funds.
Minimum Purchase $25 Minimum opening
deposit average $100
Generally $500 Generally $250, or
more
Credit Check None ChexSystems
sometimes used.
ChexSystems
sometimes used.
None
Sources: bankrate.com, iMoneyNet.com, U.S. Department of the Treasury (2005).
*Rate assuming early redemption in month 12 (first redemption date) and penalty of loss of three months of interest.

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